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Rakhi Vasavada, Financial and Legal Consultant

Category: Finance

Satisfied Customers: 3973

Experience: Graduated in law with Emphasis on Finance and have have been working in financial sector for over 12 Years

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In February I purchased a Private placement which consisted

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In February 2010 I purchased a Private placement which consisted of a Warrant and a Convertible Promissory Note. All outstanding principle and unpaid interest would be payab le in full in February 2013. I never received the principle back. This was because the Private Placement was an entity controlled by a person who filed Bankruptcy and the private placement is considered an asset in his bankruptcy estate. In addition I am told I have to refund some past "dividends" [actually it was interest] that I previously received because he did not get the courts permission to make the payments My questions: 1. Can I take the loss of my investment on my tax return? If so where [what line] 2. Do I have to return the dividends/interest? If so Can I deduct it on my tax return? If so where Thank you

Hello and welcome. Thank you for providing an opportunity to assist you.

Rakhi Vasavada :

What you are talking about is a "writing off worth less stocks" on your income tax returns and claiming the loss. Under certain circumstances you can certainly do it.

Rakhi Vasavada :

Before you can use this tax break, the instrument / stock must be totally worthless. Make sure they are not even worth even few pennies. If you truly do have a dead stock, you treat it on your tax return as if it were a capital asset you sold for zero dollars on the last day of the tax year.

Rakhi Vasavada :

So far as reporting or filing is concerned -- the valueless stock on line 1 of Part I or line 3 of Part II of Form 8949, depending on whether it was a short-term or long-term holding. If an asset became worthless during the tax year, it is treated as though it were sold on the last day of the year. That could affect whether your capital loss is a short- or long-term one.

Your worthless stock losses, either short-term or long-term, can offset capital gains dollar for dollar. If you have more in capital losses than gains, then your loss can offset ordinary income up to $3,000. Additional losses can be carried forward to future tax years.

Rakhi Vasavada :

I am not sure but I just do not think that you might have to return the dividends or interest.

Rakhi Vasavada :

I hope this helps. Please feel free to revert back with a reply if you need further assistance and I would be more than happy to help you further.

You have a very good question in deed. You will have to keep answers / documentation for the IRS just in case if you are asked to prove that it was a worthless stock.

Just in case if you're questioned by the Internal Revenue Service, you need to be prepared to show:

==>There is no hope investors will ever get anything for their holdings. This isn't always easy, so do your homework.==>When the security became worthless. You must reasonably determine the date the stock lost all its value.

For this, just write some certified letters to the company's address. You know it would never reach them.Just preserve such communications. Show that all reasonable attempts where done to reach out or salvage the value of the stocks.

Once you're armed with that information, it's time to report your loss.

I am sorry but you will not be able to contact anyone if the company itself is unavailable. I do not think you might have to return the dividend.

I hope this helps. Please feel free to revert back with a reply if you need further assistance and I would be more than happy to help you further.

This type of bad debt is considered a short-term capital loss and is claimed on Schedule D of the Form 1040. As such, it will first be matched with the capital gains on the Schedule D. Any remaining loss after matching against capital gains will then flow from the Schedule D to the front of the Form 1040, with a limit of $3000.00 per year ($1500.00 for married filing separately) in deductible capital losses. The balance will be carried forward to future years and reported as a carry forward on the next year's Schedule D.

In February 2010 I purchased in a Private placement a Convertible Promissory Note. The principle was suppose to be paid back in February 2013.

I never received the principle back since the entity was controlled by an individual who filed Bankruptcy and the courts determines that the "private placement" is considered as an asset in his bankruptcy estate

You said I can write it off ob Schedule D to the extent allowable by law.

I thought that it should considered a bad debit [Since I really loaned them the money] and it should be written off on Scedule A?

Hello and welcome again. It is nice to hear from you your follow up question.

Schedule A is not applicable here. Let me explain why. Schedule A is required in any year you choose to itemize your deductions. The schedule has seven categories of expenses: medical and dental expenses, taxes, interest, gifts to charity, casualty and theft losses, job expenses and certain miscellaneous. Each of these categories has different requirements and limitations on the amount you can deduct.

Itemizing expenses on Schedule A is another category of write-offs. Itemizing is only helpful when the total deduction you calculate on Schedule A is larger than the standard deduction. Therefore, it’s useful to estimate your deductibles before making a final decision to itemize. When estimating, you can include investment expenses; state and local income, property and sales taxes; mortgage interest and insurance premiums; charitable contributions, casualty losses; gambling losses; and a wide range of job-related expenses. The adjustments you make to your income can impact your Schedule A because the you must reduce a number of your itemized deductions by a percentage of your AGI.

Coming to the main part of your question, due to reasons explained above, Schedule A will NOT be applicable here. You would continue to claim it as a Bad Debt on Schedule D.

I hope this helps. Please feel free to revert back with a reply if you need further assistance and I would be more than happy to help you further.

Excellent information, very quick reply. The experts really take the time to address your questions, it is well worth the fee, for the peace of mind they can provide you with. OrvilleHesperia, California

Graduated in law with Emphasis on Finance and have have been working in financial sector for over 12 Years

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